With a few strikes against you on a credit report, you can have trouble securing a loan, renting an apartment or even getting a job. Delinquencies -- accounts that are late or written off by the creditor -- hang around on your credit report for seven years unless you can successfully dispute them. In the meantime, you can rebuild your credit score by making some important financial decisions and sticking with the plan.
Draw up a monthly budget detailing your expected income and expenses. Collect your mortgage, secured loan and credit card statements and review your outstanding balances. Budget a fixed percentage of your income each month for the payment of your debts; the budgeted amount should meet at least the minimum payments. Note any accounts that have been closed by the creditor and either written off or referred to a collection agency. Your main task is to deal with these delinquencies immediately while gradually reducing your open lines of credit.
Pay off any revolving credit accounts as soon as you can or shift the balances to an account with a lower interest rate by borrowing on that account to pay off the other balances. When you pay off accounts, cut up and toss the credit cards. Don't close the accounts you zero out, though -- the length of your credit history is a factor in your favor when your credit score is calculated, so you want to keep your old cards open with zero balances if possible. If you keep any credit balances and determine that you can't keep up with the payments, contact the issuer to negotiate a lower rate or a payoff arrangement in which up to half your balance will be forgiven if you agree to settle the balance immediately or in a few installments. Your credit rating will take an immediate hit if the creditor agrees to forgive any of your debt, but at least you will be able to make your regular payments, which will slowly but surely cause your scores to rise again. Going forward, use your lowest interest rate account only for emergencies as you steadily pay down your outstanding balances.
Order copies of your credit report from the three major reporting agencies: Equifax, Experian and TransUnion. Examine the reports carefully and contact the creditor and the reporting agency to dispute any delinquent accounts you don't recognize. Creditors may not have reported accounts you closed in good standing or that you paid off. In addition, the report may not have removed delinquent accounts that are more than seven years old, the standard length of time for reporting delinquencies.
Make a habit of thrifty shopping and inexpensive living. This means less frequent trips to the grocery store in which you spend only the amount you've budgeted for essential food and household goods. Buy in bulk only if you truly need the item, and the purchase doesn't break your budget. Use public transportation, bike or walk to your destinations. Arrange a rideshare to work if your job is out of reach except by driving a car; work at home if possible. Shop at thrift stores, flea markets and yard sales for anything that serves its purpose just as well when it's used (for example, furniture, clothing, frames and pictures, garden tools, china and glassware, mirrors, rugs). Avoid restaurant outings and expensive coffee beverages; instead, join your friends or family in regular potluck dinners and brew your own.
- Don't open or apply for new credit accounts. Each time you do so, the request for credit verification is reported, which has a negative impact on your credit score.
- Pay rent, mortgage loans, secured loans, and utility bills on time. Getting behind on these expenses may put you in a position of needing revolving credit once again.
- Don't make arrangements with credit counseling services that demand a fee for negotiating with credit accounts and making monthly payments on your behalf. These agencies are not working in your best interest.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.